Many investors lost money over the past few years, but the endowments at prestigious universities suffered even worse. Investment performance at Harvard and Yale "badly trailed" the results at the average college, as The Wall Street Journal so delicately put it. I'm shocked -- but not because of these endowments' lackluster returns.
With exotic strategies and illiquid investments, Princeton registered a 24% loss in 2009, while Cornell took a 26% hit, and Harvard suffered a 27% drop. Compare those losses with the 18% drop for the median large endowment. Worse yet, many such institutions fund their operating expenses with the capital from endowments such as these. If they don't generate capital gains, they may be forced to cut budgets and slash salaries.
Rather than rely on capital gains to sustain our own budgets, we need to seek additional safety in the power of ever-increasing dividend streams. With such a strategy, you'll never have to float debt to avoid whittling down your principal. Princeton only wishes it could say the same.
The following companies provide a dividend yield at least as high as that of the S&P 500 (about 2%), and they've grown their dividends at more than 5% per year over the past half-decade.
|Company||Trailing Dividend Yield||5-Year Average Annual Dividend Growth Rate||FCF Payout Ratio||Sustainable Dividend Growth|
Nippon Telegraph & Telephone
Alterra Capital Holdings
Source: Capital IQ, a division of Standard & Poor's. Sustainable dividend growth assumes constant payout ratio.
Nippon Telegraph and Telephone has high dividend growth rates over the past five years, but its sustainable growth rate suggests that it will probably have to slow that dividend growth in the future. Emerson Electric, Alterra Capital, and Northern Trust vary in their dividend growth rates over the past five years, but their sustainable growth rates are all roughly comparable to their past dividend growth rates, so they should be able to maintain their respective past growth rates into the future.
These are a handful of the thousands of public companies that can help you secure a third income for life. If you'd like to see others that make the cut, try Income Investor free for the next 30 days.
Jim Royal, Ph.D., owns shares in Northern Trust. Emerson Electric is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.